Nutrisystem 2005 Annual Report Download - page 21

continue to be subject to these consent decrees, which restrict how we advertise the successes our customers have
achieved in losing weight through the program and require us to include the phrase “results not typical” in
advertisements. Regulation of advertising practices in the weight loss industry may increase in scope or severity
in the future, which could have a material adverse impact on our business.
Other aspects of our industry are also subject to government regulation. For example, food manufacturers
are subject to rigorous inspection and other requirements of the USDA and FDA, and companies operating in
foreign markets must comply with those countries’ requirements for proper labeling, controls on hygiene, food
preparation and other matters. If federal, state, local or foreign regulation of our industry increases for any
reason, then we may be required to incur significant expenses, as well as modify our operations to comply with
new regulatory requirements, which could harm our operating results. Additionally, remedies available in any
potential administrative or regulatory actions may include requiring us to refund amounts paid by all affected
customers or pay other damages, which could be substantial.
Changes in consumer preferences and discretionary spending could negatively impact our operating
results.
Our program features pre-packaged food selections, which we believe offer convenience and value to our
customers. Our continued success depends, to a large degree, upon the continued popularity of our program
versus various other weight loss, weight management and fitness regimens, such as low carbohydrate diets,
appetite suppressants and diets featured in the published media. Changes in consumer tastes and preferences
away from our pre-packaged food and support and counseling services, and any failure to provide innovative
responses to these changes, may have a materially adverse impact on our business, financial condition, operating
results, cash flows and prospects.
Additionally, the success of our business and our operating results are dependent on discretionary spending
by consumers. A decline in discretionary spending could adversely affect our business, financial condition,
operating results and cash flows. Our business could also be adversely affected by general economic conditions,
demographic trends, consumer confidence in the economy and changes in disposable consumer income.
The sale of ingested products involves product liability and other risks.
Like other distributors of products that are ingested, we face an inherent risk of exposure to product liability
claims if the use of our products results in illness or injury. The foods that we resell are subject to laws and
regulations, including those administered by the USDA and FDA that establish manufacturing practices and
quality standards for food products. Product liability claims could have a material adverse effect on our business
as we do not have contractual indemnification rights against our other suppliers, and our other remedies against
third parties and our existing insurance coverage may not be adequate. Distributors of weight loss food products,
vitamins, nutritional supplements and minerals, including our predecessor businesses, have been named as
defendants in product liability lawsuits from time to time. The successful assertion or settlement of an uninsured
claim, a significant number of insured claims or a claim exceeding the limits of our insurance coverage would
harm us by adding costs to the business and by diverting the attention of senior management from the operation
of the business. We may also be subject to claims that our products contain contaminants, are improperly labeled,
include inadequate instructions as to use or inadequate warnings covering interactions with other substances.
Product liability litigation, even if not meritorious, is very expensive and could also entail adverse publicity for
us and reduce our revenue.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
17